The European Outlook
By Arnold Kling
In the United States, over the period 1970 to 2000, GDP per hour increased by 38%. Hours per person also increased, by 26%, so GDP per person increased by 64%. In France, over the same period, GDP per hour increased by 83%. But hours per person decreased by 23%, so GDP per capita only increased by 60%. In that light, the performance of France (and of the European Union in general) does not look so bad: A much higher rate of growth of productivity than the U.S., and, as one might expect given that leisure is a normal good, the allocation of part of that increase to increased income, and part to increased leisure.
Another point that Blanchard makes is that most of the shortfall in hours worked in Europe comes from fewer hours per employed worker, rather than from reduced labor force participation or higher unemployment.
In some notes on the outlook for a cyclical recovery in Europe, however, Blanchard is cautious.
If we thought the Euro was going to further appreciate, the forecast would rapidly look worse.
He then goes on to point out that in fact the dollar indeed has to fall further in order to reduce the U.S. trade deficit.
As Blanchard points out in the first paper, his optimism depends on not reading too much into the productivity trends from 1995 onward. Those trends strongly favor the U.S. over Europe. My own inclination is to place a lot of weight on the recent rapid productivity growth in the United States, because I suspect that it is a sustainable result of our ability to put science and technology to use.
For Discussion. Why would high wages and expensive labor regulations tend to raise labor productivity in Europe?